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THE GRIND: SEPT 23, 2010

 

 

THE GRIND: SEPT 23, 2010 - Notebook Image Hedgeye

 

Another day, another grind…

 

THE GRIND: SEPT 23, 2010 - NOTEBOOK BULLISH

 

1.      SP500 continues to hold immediate term TRADE support of 1127

2.      Range in my 3-day SPY probability model remains tight and trade-able

3.      Volatility (VIX) already shot up this week from where it should have (21 support) and is now immediate term TRADE overbought

4.      All 9 sectors in our SP500 Sector Risk Mgt model remain bullish from an immediate term TRADE perspective (XLF barely holding on however)

5.      Larry Summers is leaving

6.      US Housing Starts improved finally (month-over-month) to 598,000 (AUG) vs 541,000 (JUL)

7.      TED Spread remains very narrow at 14bps wide, showing little to no counterparty risk

8.      FTSE and DAX continue to trade bullish on both our TRADE and TREND durations – both look healthier than the SP500

9.      Brazil flashing positive divergences versus global equities this week and remains bullish TRADE and TREND despite Brazil’s inflation accelerating this wk

10.  Commodities (CRB Index) remain in a Bullish Formation (bullish across all 3 of our risk mgt durations: TRADE, TREND, and TAIL)

11.  Agricultural and “soft” commodities like cotton are leading the overall bullish trend in the CRB Index (energy is the drag)

12.  Gold maintains its Bullish Formation, making higher-highs and higher-lows in the face of the Fear of Government Trade

13.  China’s Premier Wen tells Groupthinkers in Washington like it is this week (ie a sharp 20-40% appreciation of the Yuan would blow things up)

14.   Czech government issues a 2011 plan to cut deficit by 17%

15.  Russian government continues to cut spending and attempt to issue sovdebt in order to meet 2011 strategic plans

 


THE GRIND: SEPT 23, 2010 - NOTEBOOK BEARISH


1.      SP500 remains broken from an intermediate term TREND perspective w/ our “Walk The Line” level sustaining overhead resistance at 1144

2.      US stock market breadth continues to deteriorate (hyper early signals, but they aren’t the bullish factors they were 3 weeks ago)

3.      US stock market down days are led by the Financials (XLF) this week and the low-beta dividend trade (XLU) is flashing bullish again

4.      ABC Washington Post Consumer Confidence dove wk over wk back down to -46 vs -43 last week (2wks of not up despite stocks being up)

5.      MBA mortgage applications fall for the 2nd consecutive week to -3.3% this wk (this is one of our lead high-frequency US growth indicators)

6.      Jobless claims rise for the 1st week in 4, to 465,000, reminding risk managers that what we have here is JOBLESS STAGFLATION

7.      II Bullish to Bearish weekly indicators are now flashing one of the most bearish contrarian signals I have seen on immediate term TRADE basis ever

8.      US Existing Homes Inventory drops from 12.5 months to 11.6; that’s still a gargantuan mountain of reported supply (ex-shadows)

9.      Baltic Dry Index is down for 8 days in a row

10.  Japanese equities were down when they traded this week

11.  Asian Equities that traded last night caught an inflation cold as the inflation data for AUG in Singapore, Malaysia, and HK all ramped month over month

12.  Eurozone Manufacturing PMI slowed in SEP to 54 from 55 in AUG

13.  Eurozone Manufacturing Services-PMI slowed in SEP to 54 from 56 in AUG

14.  Germany’s Manufacturing and Services PMIs tracked the same sequential rollover that the overall region did

15.  French and German Unions made headline news today; everything about Austerity isn’t kind

16.  Italy finally reported Q2 unemployment and it went up again to 8.5% vs 8.4% in Q1; Italy continues to concern us more and more on the margin

17.  Russian and Norwegian Equities are breaking down as the price of oil does

18.  Oil price has confirmed an intermediate term TREND line breakdown this week with critical TREND line resistance = $76.16/barrel

19.  Natural Gas remains in a Bearish Formation (bearish TRADE, TREND and TAIL) and looks like it wants to test $3.60

20.  Portugal is selling more and more sovereign debt at higher and higher yields; this won’t end well

21.  Greek stocks look horrendous again this week despite Papandreaou doing roadshows in America

22.  US Treasury yields continue to break down to lower-lows across the curve with 2-yr yields hitting all time lows

23.  Yield Spread (10s minus 2s) has compressed 17bps week to date (explains why XLF (Financials) is flashing another negative divergence vs SPY today

24.  US Dollar is breaking below APR and AUG lows; pervasive BURNING OF THE BUCK becomes a bad thing for globally interconnected risk

25.  US Rumor Mill chasing about everyone buying everyone has yielded ZERO takeouts of the 69 we observed as “rumors” this week; sad

 
Time is running out on both September month end and Q3. There are performance problems in our industry and I think this reality combined with a liquidity squeeze to cover shorts has kept this market from going down this week. That said, it hasn’t gone up either – and that is new. So are the DATA and PRICES tilting demonstrably to the bearish side (relative to where they were 3 weeks ago) in my notebook.
 
As a result, I continue to:

    A)    take down gross invested exposure in the Hedgeye Asset Allocation Model and...

 

    B)    sell longs in our Hedgeye Portfolio. On a weak market open today, I covered 3 short

            positions (WYNN, HOT , and CRI) and bought 1 long (DBA).

 

I plan on staying in a low-gross-exposure position and at the same time aggressively trading (or managing risk around) short positions for the next few weeks. I am increasingly worried about October.
 
KM


Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT


The Grind: What's In My Notebook?

Another day, another grind…

 

BULLISH:

  1. SP500 continues to hold immediate term TRADE support of 1127
  2. Range in my 3-day SPY probability model remains tight and trade-able
  3. Volatility (VIX) already shot up this week from where it should have (21 support) and is now immediate term TRADE overbought
  4. All 9 sectors in our SP500 Sector Risk Mgt model remain bullish from an immediate term TRADE perspective (XLF barely holding on however)
  5. Larry Summers is leaving
  6. US Housing Starts improved finally (month-over-month) to 598,000 (AUG) vs 541,000 (JUL)
  7. TED Spread remains very narrow at 14bps wide, showing little to no counterparty risk
  8. FTSE and DAX continue to trade bullish on both our TRADE and TREND durations – both look healthier than the SP500
  9. Brazil flashing positive divergences versus global equities this week and remains bullish TRADE and TREND despite Brazil’s inflation accelerating this wk
  10. Commodities (CRB Index) remain in a Bullish Formation (bullish across all 3 of our risk mgt durations: TRADE, TREND, and TAIL)
  11. Agricultural and “soft” commodities like cotton are leading the overall bullish trend in the CRB Index (energy is the drag)
  12. Gold maintains its Bullish Formation, making higher-highs and higher-lows in the face of the Fear of Government Trade
  13. China’s Premier Wen tells Groupthinkers in Washington like it is this week (ie a sharp 20-40% appreciation of the Yuan would blow things up)
  14.  Czech government issues a 2011 plan to cut deficit by 17%
  15. Russian government continues to cut spending and attempt to issue sovdebt in order to meet 2011 strategic plans 

BEARISH:

  1. SP500 remains broken from an intermediate term TREND perspective w/ our “Walk The Line” level sustaining overhead resistance at 1144
  2. US stock market breadth continues to deteriorate (hyper early signals, but they aren’t the bullish factors they were 3 weeks ago)
  3. US stock market down days are led by the Financials (XLF) this week and the low-beta dividend trade (XLU) is flashing bullish again
  4. ABC Washington Post Consumer Confidence dove wk over wk back down to -46 vs -43 last week (2wks of not up despite stocks being up)
  5. MBA mortgage applications fall for the 2nd consecutive week to -3.3% this wk (this is one of our lead high-frequency US growth indicators)
  6. Jobless claims rise for the 1st week in 4, to 465,000, reminding risk managers that what we have here is JOBLESS STAGFLATION
  7. II Bullish to Bearish weekly indicators are now flashing one of the most bearish contrarian signals I have seen on immediate term TRADE basis ever
  8. US Existing Homes Inventory drops from 12.5 months to 11.6; that’s still a gargantuan mountain of reported supply (ex-shadows)
  9. Baltic Dry Index is down for 8 days in a row
  10. Japanese equities were down when they traded this week
  11. Asian Equities that traded last night caught an inflation cold as the inflation data for AUG in Singapore, Malaysia, and HK all ramped month over month
  12. Eurozone Manufacturing PMI slowed in SEP to 54 from 55 in AUG
  13. Eurozone Manufacturing Services-PMI slowed in SEP to 54 from 56 in AUG
  14. Germany’s Manufacturing and Services PMIs tracked the same sequential rollover that the overall region did
  15. French and German Unions made headline news today; everything about Austerity isn’t kind
  16. Italy finally reported Q2 unemployment and it went up again to 8.5% vs 8.4% in Q1; Italy continues to concern us more and more on the margin
  17. Russian and Norwegian Equities are breaking down as the price of oil does
  18. Oil price has confirmed an intermediate term TREND line breakdown this week with critical TREND line resistance = $76.16/barrel
  19. Natural Gas remains in a Bearish Formation (bearish TRADE, TREND and TAIL) and looks like it wants to test $3.60
  20. Portugal is selling more and more sovereign debt at higher and higher yields; this won’t end well
  21. Greek stocks look horrendous again this week despite Papandreaou doing roadshows in America
  22. US Treasury yields continue to break down to lower-lows across the curve with 2-yr yields hitting all time lows
  23. Yield Spread (10s minus 2s) has compressed 17bps week to date (explains why XLF (Financials) is flashing another negative divergence vs SPY today
  24. US Dollar is breaking below APR and AUG lows; pervasive BURNING OF THE BUCK becomes a bad thing for globally interconnected risk
  25. US Rumor Mill chasing about everyone buying everyone has yielded ZERO takeouts of the 69 we observed as “rumors” this week; sad 

Time is running out on both September month end and Q3. There are performance problems in our industry and I think this reality combined with a liquidity squeeze to cover shorts has kept this market from going down this week. That said, it hasn’t gone up either – and that is new. So are the DATA and PRICES tilting demonstrably to the bearish side (relative to where they were 3 weeks ago) in my notebook.

 

As a result, I continue to A) take down gross invested exposure in the Hedgeye Asset Allocation Model and B) sell longs in our Hedgeye Portfolio. On a weak market open today, I covered 3 short positions (WYNN, HOT , and CRI) and bought 1 long (DBA). I plan on staying in a low-gross-exposure position and at the same time aggressively trading (or managing risk around) short positions for the next few weeks. I am increasingly worried about October.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Grind: What's In My Notebook? - The Grind


R3: M, PSUN, CROX, and Moody's

RESEARCH ANECDOTES

  • Sears continues to up the ante with its apparel program, this time recruiting UK retailer Next for its latest collaboration. Sears.com becomes the exclusive retailer of Next product in the U.S in a similar arrangement to the MANGO/JCP partnership (except this deal has no retail presence). Recall that Sears also has a partnership in place with French Connection as well as announced sublet with Forever 21. In other words, Sears is becoming a mall within a mall.
  • According to an InsightExpress study, 45% of consumers prefer receiving mobile coupons via text message, with 28% preferring to locate them via an app, and 27% preferring to receive them in-store. A substantial number of mobile ad and coupon campaigns are currently focused on geographic targeting, allowing advertisers to drive traffic to a specific region or local.
  • Following in the footsteps of Burberry, Gucci livestreamed its Milan runway show as part of its Gucci.com redesign. Unlike other live runway events online, Gucci’s virtual fashion show included virtual guests and virtual seat assignments. Throughout the show, 10,000 “guests” Tweeted and chatted as they watched the latest fashions strut down the runway.

OUR TAKE ON OVERNIGHT NEWS 

 

Macy's Plans To Hire More for Holiday - Macy's Inc. plans to hire 65,000 seasonal workers to staff its stores, call centers and distribution centers for the holidays. The department store, which employs 161,000 year round, said the holiday hiring represented a slight increase from the past given the 3 to 3.5 percent comparable-store sales gain it expects to see in the second half. “It is vitally important that our customers are well-served during the busiest shopping time of the year," said Terry Lundgren, chairman, president and chief executive officer. Most of the positions are part time. <wwd.com/business-news>

Hedgeye Retail’s Take:  Given that customer service has been on the decline for a while in the traditional department store channel, it’s good to see a commitment to holiday staffing.  With that said, if sales don’t materialize expect the temporary help to be cut back and matched commensurately with sales demand.

 

Moody's Cuts Outlook on Retail Sector - This might be about as good as it gets until 2012. Moody’s Investors Service Wednesday cut its credit outlook on the retail sector to “stable” from “positive.” The debt watchdog said growth in U.S. retail earnings, before interest and taxes, would “slow to a modest low-single-digit pace over current levels for the next 12 to 18 months.” “Consumers continue to face high unemployment and personal debt levels along with low asset values and tight credit availability which will continue to make them focused on value,” Moody’s said, noting holiday sales and margins would increase only marginally. Retailers are coming up against tougher comparisons on both the sales and the margin fronts and executives are running out of ways to boost growth. “Retailers have generally exhausted the ability to increase earnings from expense reductions and inventory efficiencies,” Moody’s said. <wwd.com/business-news>

Hedgeye Retail’s Take:  A seemingly proactive move here from Moody’s and an outlook which we can’t disagree with.  We’re simply moving beyond the point of “this is as good as gets”.

 

PSUN Tough Road Ahead - A year after becoming president and chief executive officer of teen retailer Pacific Sunwear of California Inc., Gary Schoenfeld gave a pep talk before the crucial back-to-school season. With the $1 billion company posting an eighth consecutive quarter of losses in August — and forecasting a ninth — he might have to give a few more. It isn’t business as usual at PacSun, which along with the flow of red ink, had to fend off a hostile takeover bid last year by the much smaller athletic brand Adrenalina Inc. The recession has weakened the teen retail sector. There are fewer jobs for young people and their parents have diminished discretionary income. Apparel spending among 13- to 17-year-olds dropped 6% in June according to The NPD Group. In an effort to reverse its slide, PacSun has identified three key areas: product, customer relevance and engaging shoppers in stores. The turnaround blueprint includes pumping up the fashion quotient in juniors, reviving its shoe category and offering more exclusive items from vendors. After years of elevating its private label business, PacSun is courting vendors, including Fox, Volcom, Hurley, Quiksilver, O’Neill and Roxy, as partners for exclusive offers, in-store displays and events that are intended to lure shoppers from other mall-based competitors .<wwd.com/business-news>

Hedgeye Retail’s Take:  Nothing new here except that patience appears to be waning.

 

Niche Team Sports Growing - According to the SGMA, overall participation in the top seven team sports in the U.S. declined in the last year but participation in seven 'niche' team sports is on the rise. Those seven 'niche' team sports which had respectable gains in participation since 2008 are fast-pitch softball (up 13.8%), ice hockey (up 12.2%), rugby (up 8.7%), beach volleyball (up 7.3%), lacrosse (up 6.2%), indoor soccer (3.7%), and gymnastics (3.6%). <sportsonesource.com>

Hedgeye Retail’s Take:  While it’s important to keep on an eye of the demographic trends underlying athletic participation, we don’t see UA or NKE making a big push into softball or beach volleyball anytime soon.

  

Crocs Launches E-Commerce in Canada and Australia - Crocs, Inc. announced the launch of Canadian and Australian websites as well as a new consumer mobile site. In addition to providing supplementary revenue opportunities, the new online offerings are designed to enrich the Crocs online experience.  <sportsonesource.com>

Hedgeye Retail’s Take:  Expanding on the company’s revamped e-commerce platform, we should continue to see additional countries added to Crocs’ direct to customer infrastructure. 

 

The Sports Authority Checks in With a Location Based App - The Sports Authority Inc. is testing location-based promotions by offering discounts to customers who check in at stores and sports stadiums using a location-based rewards iPhone application. The rewards app comes from Loopt Inc., a social mapping company that allows users to check in wherever they are using their mobile phones and see where their friends are, similar to location-based services offered by Gowalla and Foursquare.  <internetretailer.com>

Hedgeye Retail’s Take:  As we’ve noted in recent months, location based applications present the biggest opportunity for marriage between mobile devices and retailing.  Driving traffic to stores may actually be an even bigger opportunity in the intermediate term than actual transactions taking place over an iPhone.

 

Levi's Conducting $100 mm Global Media Review - Levi's is conducting a global media review, the brand has confirmed. The brand spends an estimated $100 million annually on ads worldwide -- about $50 million of that in the U.S., according to Nielsen. Omnicom's OMD is Levi's lead U.S. media shop and is believed to be participating in the review. Another contender is said to be Publicis Groupe's Starcom, which works for the brand in some overseas markets. <brandweek.com>

Hedgeye Retail’s Take:  Despite the review (which is part of any brand’s marketing process) we continue to expect Levi’s to push the envelope with its marketing.  If you haven’t see this, check it out: http://www.youtube.com/user/walkUSA


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20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

European Bearish Data Roam

<revised with correct chart below>

 

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD

 

Position: Eurozone, Germany and France Services and Manufacturing PMI numbers decline in September; UK housing loan data continues to wane; and risk heightens across the region, in particular vis-à-vis rising CDS spreads in Portugal and Ireland above the critical 400bp line (see charts below). Today’s data is in line with our call for a material downward inflection in fundamental European data across most of Europe beginning in August and continuing over the intermediate term TREND. 

 

We’re however not bearish on Europe outright. As we noted in a recent post titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND line for the DAX is 6089; our TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.

 

Below is a short discussion of today’s charts:

 

1.  We expect Eurozone Services and Manufacturing PMI to continue to wane over the intermediate term TREND as austerity measures across the region squeeze the consumer and dampen the economic outlook out on the curve.

 

European Bearish Data Roam - h1

 

2.  The UK housing market remains a critical fundamental headwind (like in the US) that we think will continue to drag down growth prospects in the UK.  According to the British Bankers Association, loan approval for house purchase declined -7.2% M/M and fell -22.3% Y/Y.  Noteworthy is that year-over-year comps will get increasingly difficult up to a loan approval peak in Dec. ’09.

 

European Bearish Data Roam - h2

 

3.  As an important leading indicator, the risk trade in Portugal and Ireland is breaking out vis-à-vis CDS spreads, in particular.  As we noted in late ’09 and 1H10 in relation to Greece, and as history has shown in relations to the CDS spreads of Lehman Brothers and Bear Stearns, the 400bp line is a critical inflection line (Shark Line) to watch as the probably of upside risk heightens materially as you move through the line.

 

European Bearish Data Roam - h3

 

Matthew Hedrick
Analyst


INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT

Improvement in Single Family Housing Starts Leads Improvement in Unemployment

The folks at Calculated Risk (calculatedriskblog.com) showed an interesting chart yesterday of Single Family Starts versus unemployment.  We’ve recreated this chart below.  As you can see, an improvement in single family starts typically leads an improvement in unemployment by 12-18 months.  (The 2001 recession was an exception.) Single family starts have not been improving in recent months; rather, following the expiration of the tax credit, they’ve trended sharply downward.  This suggests that we are not in for a swift improvement in unemployment from here – in fact, the downward move suggests that unemployment could increase on a reported basis (though clearly the labor force participation rate is affecting the unemployment print, as we demonstrated two weeks ago). 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 2

 

Initial Claims Climb 

Initial claims rose 12k last week to 465k (rising 15k before the revision).  Rolling claims came in at 462.25k, a decline of 3.25k over the previous week. Reported claims climbed back toward the middle of the range of 450-470k that the series has occupied for all of 2010. While the rolling claims number was incrementally bullish, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 3

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 4

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 1

 

Census headwinds should abate at the end of September, as this is the last month in which Census has historically been a drag. 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 5

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 


CHART OF THE DAY: Real Estate Bubbles

 

 

While the United States of America in 2010 may not “precisely” be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day that overlays the Japanese real estate bubble with ours. *Note the duration.

 

CHART OF THE DAY: Real Estate Bubbles - Japan U.S. Real Estate normal

 

 

 

This chart was extracted from our EARLY LOOK note, available to RISK MANAGER and INVESTOR subscribers in real-time, at 8am ET every morning.  The Early Look is unlocked at 4pm ET for non-subscribers.  To gain access the note in its entirety, please subscribe or sign-up for a free-trial.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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